Posts Tagged ‘supply chain contracts’

Imagine you are service provider and you line up a bunch of extra capacity because your customers tell you that they are expecting they are really going to need you. What should you do when your customers turn out not to have that much business for you?

If you are UPS, you don’t have to imagine. This is a problem they face at the holidays. Retailers want to make sure that there will be space for their shipments on the truck, so they have an incentive to talk up their potential. Of course, no one can tell the future so sometimes their big talk will prove to be just hot air. UPS apparently is thinking of making the initial forecasts from retailer a little more binding (UPS Tries a New Twist on Surge Pricing, May 1, Wall Street Journal).

With the retail world in upheaval, UPS is asking retailers to help pay when the extra space and workers aren’t put to use—or even when the boxes don’t match the sizes that retailers promised earlier in the year.

“If there are variations to the plan, let’s see what we can do, but we should be compensated accordingly,” said UPS Chief Executive David Abney in an interview. He said the charge isn’t meant to be punitive but one element of a broader negotiation with retailers over pricing during peak times.

UPS is apparently also thinking of imposing charges at times beyond the holiday — say for flowers at Valentine’s or when a new product release causes volumes to spike.

The contract in question is a slotting allowance. Slotting allowances are paid by food manufacturers to retailers in order to get items onto shelves. The money is paid upfront and often varies with the number of stock keeping units (SKUs) introduced and the number of stores in which the products will be stocked. The term comes from the act of creating a space — i.e., a slot — for an item in a warehouse or on a store shelf. The origin story is that retailers at some point started demanding that vendors compensate them for the costs they incur in helping launch new products (which often fail). The reality is that the money involved is now significantly higher than the cost of rearranging products. In effect, retailers are selling off their real estate.

There is a good chance that the last time you bought something on Amazon’s website, it wasn’t actually sold by Amazon. It instead came from an independent merchant, and Amazon just handled the logistics of getting the item to you. That arrangement has an implication that I never considered until a recent Wall Street Journal article (Amazon Prods Its Sellers to Free Up Warehouse Space, Nov 4): By inviting in the additional sellers, Amazon is giving up control of just what is in its fulfillment centers. If a merchant wants to sell miscellaneous crap, that is their business. At the same time, however, that miscellanea potentially ties up space that Amazon needs — or at least could use more profitably on other items. This is particularly true as we head into the holiday season when Amazon should reasonably expect business to be booming.

The World Series starts tonight. While everyone in Chicago is focused on the prospect of the Cubs winning the Series, that is not a certainty. The one thing that is certain is that someone is going to lose – and that raises the prospect of a Cub or Chief Wahoo on t-shirt proclaiming that a team won something that they didn’t.

So what happens to t-shirts and other tchotchkes celebrating events that never happened? That was the topic of a recent Chicago Tribune story (Where do losing baseball teams’ postseason T-shirts end up?, October 18). The article itself is a little confused (it very much seems that a paragraph was dropped) but it does layout some options:

Last year, VF Licensed Sports Group required customers who wanted early access to merchandise celebrating a baseball team’s postseason run agree to ship any merchandise with a losing team’s 2015 MLB postseason clinch logos, images or graphics to international nonprofit World Vision. Customers had 24 hours following a loss to get in touch with World Vision to start the donation process, according to a 2015 agreement provided by a retailer. …

Another retailer was sent a revised agreement that replaced the donation requirement with a mandate to ship any items for losing teams back for destruction. …

Retailers who violate an agreement not to sell, advertise or promote the losing team’s merchandise agree to pay $100,000 per breach, according to the 2016 World Series preprinted merchandise agreement.

For those who are not baseball fans, let me give you a quick update: The Chicago Cubs are really good this year. They won over 100 games in the regular season and have now jumped out to a 2 – 0 lead in their best-of-five series with the San Francisco Giants. FiveThirtyEight has them as the favorite to win the World Series.

If all of that is news to you, you should also be told that the Cubs have, frankly, sucked for a long, long time. They haven’t won a pennant since 1945 and a World Series since 1908. There is even a short story (The Last Pennant Before Armageddon) tying the Cubs winning a pennant to the end of the world. (To answer the obvious question, the World Series is scheduled to start on October 25th. Barring rain delays, the last possible game would be on November 2nd. The US presidential election is on November 8th.)

So if the Cubs make it to the World Series, there will be a lot of excitement around here. If they actually win the Series, Cook County will likely shut down for a month. And that all raises a question: How many Cubs t-shirts can be sold?

Tight supplies occur in lots of supply chains. Pick any industry with rapidly rising demand and you are likely to see at least the occasional glitch in the supply of a key component or input. Still, the setting described in a recent Wall Street Journal article is fairly unique (Hunger for Organic Foods Stretches Supply Chain, Apr 3).

Nature’s Path is among a number of organic-food purveyors taking steps to tackle supply constraints that are hampering the growth of one of the hottest categories of the U.S. food industry. Companies including soup maker Pacific Foods of Oregon Inc. and publicly traded burrito chain Chipotle Mexican Grill Inc.are digging deeper into the supply chain with such moves as financing farmers, offering technical training and hiring full-time headhunters to recruit organic growers.

The efforts are aimed at ramping up organic-food output that has failed to keep pace with surging consumer demand, due in part to the significant costs and risks that U.S. farmers face in converting from conventional to organic farming. Longer-term, the steps could help bring down organic-food prices that have been bolstered by tight supplies, companies say.

According to the article, retail sales of organic food have tripled in the last ten years and that has put a lot of pressure to increase the output of organic products.

You may not be familiar with Xiaomi, but you likely will be soon enough. Xiaomi is a Chinese smartphone maker. It sold its first smartphone in 2011 and is already the third biggest player in the market. It also holds the distinction of being the most valuable tech start up going — yes, even more valuable than Uber. (See here and here for more.)

How did they get so big so fast? Mostly by being cheap. Their phones offer a level of value that, say, Apple cannot touch. A new iPhone without a contract with a carrier (i.e., without a subsidy) will set you back at least $600. If you want more storage and a bigger screen, that creeps up to near a thousand dollars. Xiaomi’s phones top out around $500 and they have offerings under $150.

So how does Xiaomi manage to offer so much for so little? That is the topic of a TechCrunch article (This Is How Xiaomi Keeps The Cost Of Its Smartphones So Low, Jan 19). Now part of their success is due to their distribution strategy. In China it sells only on-line. Hence, it can cut retailers or carriers out of the equation. But that is not the only factor. How they mange their product line and purchasing (and consequently their supply chain) also makes a difference.

[Hugo] Barra [the company’s VP of International] explained that Xiaomi is able to make price concessions thanks to the combination of a small portfolio and longer average selling time per device.

“A product that stays on the shelf for 18-24 months — which is most of our products — goes through three or four price cuts. The Mi2 and Mi2s are essentially the same device, for example,” Barra explained. “The Mi2/Mi2s were on sale for 26 months. The Redmi 1 was first launched in September 2013, and we just announced the Redmi 2 this month, that’s 16 months later.”